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Ben Bernanke Is Running out of Ammo

Posted by Larry Doyle on August 10, 2010 4:24 PM |

What if you were playing a round of golf with a set number of balls and were restricted by how often you might be able to use specific clubs? Might feel somewhat overwhelmed, no? What if you faced this predicament when you realized that you were still many holes away from the clubhouse? Might feel increasingly overwhelmed, no? Why do I have this mental image of Ben Bernanke and his fellow Fed governors standing out on the farthest point of a golf course wondering just how the heck they are going to finish their round–that is, navigate the economy–and get back to the clubhouse. 

Let’s quickly review the Federal Reserve’s  statement released today. In the process, let’s take the pulse of the economy and  the Fed’s ability to impact it. From the Federal Reserve’s website,  

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

In my opinion, that description right there is totally consistent with my assessment that our economy has ‘walking pneumonia’ as it undergoes significant structural changes. 

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

They do not dare admit that deflation is the greater fear.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

“Extended” is getting longer every time these governors get together. 

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

How do you ease policy when you have very few tools–clubs and balls– left in the bag? Reinvest principal from mortgage security paydowns. That form of easing is trying to hole out from 400 yards away with a 7-iron.   

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Right …and good luck.

LD

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  • Rob

    LD:

    In the fed’s statements since the larger crisis started in Fall 08 there have been two consistent themes; (1) an “extended” period of unemployment; and (2) keeping interest rates low for an “extended” period of time. Unfortunately for the economy and our country, keeping interest rates low has not worked as banks are unwilling to provide cheap credit to anyone as they are using/hoarding these funds in an attempt to clean up their disasterous balance sheets. It has become a vicious cycle in the past two years of the unemployed and employed not spending because they cant borrow like before which, in turn, is causing banks to tighten up and not loan to businesses which could hire people who are almost begging for work.

    To use your golf analogy, its time for a hybrid rescue to get out of the thick rough; the Fed should approach Congress and the President to advocate a jobs program that would provide training and REAL jobs (not census counters) to those that need them. Our country has too many thinkers and we need more skilled workers who can build infrastructure, goods, and green-tech that can propel our economy out of this death-spin.

  • Mike

    Yeah if we deflate we’d have to not only default on our debt, but also realize all these embedded losses were trying to hide in our banks and through things like Fannie and Freddie.

    Maybe go to war with China, who knows. At least gas would be cheaper right?

    So the rich get poorer, and the country will be unable to borrow for 100 years or so? Or am I wrong here? So all that discount window money which went straight to Treasuries would be worthless.

    Is QE going to stop deflation? Or will it just send DJ and S&P to all time highs? I think we need helicopters dropping C-notes to stop deflation.

  • fred

    What if the Fed had a meeting and nobody went?

    Wasn’t it the Fed that said balance sheet expansion would end in March 2010? Wasn’t it the Fed that said it would become more transparent?

    Let’s go back to the Congressional testimony provided by Ben Bernanke? How is it again that the Fed can more than triple the size of it’s AAA balanace sheet made up of 100% US treasury bonds, bills and notes, and exchange it for 100% junk made up of the most toxic securities on the planet, mortgage backed securities? How is it that banks are allowed to swap out these toxic securities for US treasuries, surely not under the watchful eye of the Fed?

    Just how does this facilitate markets and promote capitalism? Is it any wonder banks play the games they do!

    If you read thru the lines of the Fed statement, it is clearly their intention to deceieve with the skill set of a magician.

    Folks the QE2 is leaving port as we speak and the Fed doesn’t want anyone to notice.

    The Fed will attemp the impossible, to expand the size of its balance sheet without anyone noticing. How will they do this, by swapping out triple A for junk.

    Let me explain, if you have a security worth $1.00 and exhange it for a security worth .50 cents you have in essence given the holder of this security .50 cents, that folks is Quantitative Easing. Furthermore, to increase the velocity of QE2, as principal is paid, you tell everyone that you will by Treasuries but wink, wink, you never said you would hold Treasuries so you can continue the shell game and swap out these treasuries for more junk.

    It gets even better, thru indirect agreements with servicers. If borrowers don’t pay by the due date or pay at all for that matter, the Fed can simply look the other way, thus increasing the velocity of QE2 even further.

    WOW, what a scam! The gov’t can do whatever it wants whenever it wants. Once again the ends or should I more accurately say the intentions justify the means, just the sort of thing that builds the confidence of small business and makes them want to expand!

  • Bill

    Banks should be making out like el bandido, getting funds for zero basically and arbitraging. I notice the broker margin rate at Fidelity is almost 9%–that’s a secured loan–and their money markets pay almost zero.

  • Sean

    The Fed may as-well replace the term “extended” with “forever” or “until the economy ceases to funtion.”

    Anyway, don’t-let ‘ol-Ben fool-‘ya, BB’s got plenty-of-clubs left in his bag, and he’s simply chosen not to play them yet, just waiting for the right moment; he could reduce-or-eliminate the interest being paid on bank deposits at the Fed, thereby “encouraging” the banks to speed-up the velocity of money, probably by lending back-in to the home mortgage market, most of which is backstopped now by FHA & Fannie, so that’s a good investment for as long as the Uncle Sam can continue to borrow.

    Also, if Uncle Ben does happen to run out of clubs, don’t-forget, he’s already reminded us that he’s got a helicopter and a printing press at his disposal, which will certainly get him back to the clubhouse. Since the good doctor has never piloted a helicopter before with a printing press inside, he may very-well crash into the clubhouse and burn it down, which certainly would not help those of us who are currently dining in the clubhouse; however, burning down the house is what Fed Chairmen seem to be best at anyway, and so we’d be wise to take Ben Bernanke seriously about his helicopter and printing press. In-fact, I think I overheard him on his cell-phone just before teeing-off the back-nine giving instructions to start oiling-up the ‘copter just-in-case he runs into trouble, it’ll-be-ready.

    I just hope Benny-boy’s caddie has plenty of silver coins stashed-away because the US$-tip he’ll get after his loop won’t be worth very much….






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